OPEC in No-Win Situation After "Oversold" Extension Meeting

by Ship & Bunker News Team
Tuesday May 30, 2017

No amount of spin last week by the Organization of the Petroleum Exporting Countries (OPEC) could prevent a nearly 5-percent drop in crude prices after the cartel announced a nine month extension to its troubled production cutback initiative, and this week the familiar argument was reiterated that even if the OPEC extension succeeds in boosting prices, it will merely cause U.S. shale to increase operations.

The dire message was delivered by the Financial Post, which portrayed OPEC as "cutting itself into irrelevance" while U.S. and Canadian rig counts steadily increase (by 116 percent over the past year in the case of the latter, according to Baker Hughes data), inventories remain robust, and prices remain roughly where they were eight months ago.

Moreover, the Financial Post notes that the changing demand landscape threatens the cartel's traditional dominance in market share: "Demand in Western countries is flat, driven by energy-efficiency and slow-growing economies, and the U.S. may become a net energy exporter over the next decade; China, the largest net importer of crude and one of the world's fastest-growing markets, has begun buying more from non-OPEC countries."

The Post concludes that while the Saudis' earlier gambit to increase production and quash U.S. shale growth "was a risky, hard gamble, not for the feint of heart, and victory was far from assured, but today OPEC looks like it's playing to neither win nor lose.

"The game is over."

A report from Bloomberg New Energy Finance (BNEF) suggests that is it "game over" not only for OPEC but the oil market in general: that's because the report argues that within as little as eight years, electric cars in Europe and North America will be cheaper to buy and run than traditional vehicles powered by internal combustion engines.

BNEF believes the trend to improving battery technology and falling costs, combined with higher costs for diesel and gasoline cars, will mean electrics will match the cost of gasoline-burning engines by about 2025.

CBC News, which reported BNEF's findings, stated that "Falling prices could also lead to exponential sales growth from today's low levels, sharply cutting global demand for gas and diesel."

It's anyone's guess to what extent such grandiose predictions will come true, but for the meantime the focus - at least in terms of media exposure - is still on OPEC, with analysts trying to make sense of traders' vociferous reaction to the cartel's cutback extension announcement.

Amrita Sen, co-founder and chief oil analyst at Energy Aspects, told Reuters that "OPEC oversold the meeting to the market way too early" - referring to hints prior to OPEC's May 25 meeting that the cartel might also deepen supply cuts, extend them by as long as 12 months, curtail exports, and tell the market how exactly it would terminate supply curbs in 2018 - all of which raised market expectation much higher.

For the record, many experts doubt that OPEC's extensions will do much to combat rampant production from rogue nations, and last week Deutsche Bank predicted that "Output controls will eventually be extended at least until the end of 2018, and more likely than not into 2019....at this pace, it will not be until at least the end of 2018, or indeed, 2019, when surplus inventories can be eliminated."